The six key objectives of retirement reform
The retirement reform and national health insurance (NHI) debates – put on ice during the recent economic recession – are suddenly on the agenda again. The feeling from industry commentators is that NHI has jumped the queue to occupy first place on govern
They invited a bunch of industry experts to share the latest in global retirement reform thinking. First to the podium was Edward Whitehouse from the Social Policy Division of the Organisation for Economic Co-operation and Development (OECD). His presentation touched on the six key objectives of retirement reform. FAnews was on hand to find out more.
1. Wide coverage
An effective social security net should cover as much of a population as possible. “You want to have wide coverage – you want people to be members of a pension system whether it’s public or private, mandatory or voluntary,” said Whitehouse. This is difficult in a country like South Africa where unemployment is high. Some five million individual taxpayers are already part-funding more than 13 million grant recipients. South Africa’s eventual solution will be further aggravated if government introduces additional payroll taxes to fund its ambitious healthcare initiative.
2. Adequacy
A social solution cannot fulfil its purpose if inadequate benefits are provided. Countries around the globe have been working hard to improve the “safety” benefits to low income workers. Places like Finland and Sweden have perfected the system while South Africa still has some way to go. The Social Old Age Grant (SOAG) is currently paid to men and women over 60 years of age, but only if they have no other retirement funding (means testing).
3. Financial sustainability and affordability
The recession came as a shock to many countries. And many OECD countries quickly realised they wouldn’t be able to afford their existing pension commitments. Fearing taxpayer revolt they’ve had to get sneaky when cutting retirement benefits. Many OECD countries have made cuts by stealth, by for example changing from a final salary to a lifetime salary model. Another recent development has been to alter pension systems from earnings-linked to inflation-linked indexation. Most countries are also paying close attention to the link between life expectancy, retirement age and pensions too.
The trend across the region has been toward equalising of pension ages (across countries and genders within countries). Norway and Iceland have already implemented retirement from age 67, with countries like the US and Germany following suit. A quick look at mortality statistics shows why this shift is necessary. In 1960 the average male worker lived another 13.5 years after retirement – nowadays he survives another 18 years. Women tend to live even longer in retirement.
4. Economic efficiency
A pension system must be designed in such a way to prevent distortions. Many citizens in OECD countries took early retirement because the option was available to them. There’s also evidence of savers avoiding saving for their own account – particularly in Australia, Canada and the UK – for fear of losing state-subsidised retirement benefits to means testing... Obviously these “flaws” should be ironed out during the early stages of the retirement reform model.
5. Administrative efficiency
There have been problems with administered schemes. Prior to social security reforms in Greece the country had 130 different public social schemes. After the first round of rationalisation they were left with 13 – and after the economic meltdown have only three. Evidence suggests the administrative charges levied by private pension administrators are excessive, with numerous attempts being made to keep such costs in check.
6. Security of benefits in the face of risk and uncertainty
“Pensions are a long term business,” said Whitehouse. “If you start contributing at age 20 you could draw your last benefit some 60-years later – so any system must be secure and relatively risk free!” Countries around the globe have used different systems to ensure the security of benefits. The typical solution is based on compulsory contributions to defined contribution plans, such as that built in Chile. A range of countries including Australia, Norway and Sweden followed suit. A number of countries have also attempted to save a percentage of GDP each year. Australia tucks away one percent of GDP each year and Norway is already sitting on a “savings” reserve totalling 80% of GDP. But countries struggle with the preservation concept too – with Ireland burning through its retirement reserves to bail out its banking system through the recent economic downturn.
Conclusions
What should South Africa do? The SOAG is of limited use in an overall retirement reform system, although it remains effective in dealing with old age poverty. Whitehouse says the system is well-targeted and inexpensive. A grant system could remain as the cornerstone of South Africa’s retirement income provisions
We can build on this foundation by introducing a second pillar to our retirement reform model. We need to introduce some form of savings mechanism – but the model requires further debate. Is it going to be voluntary or mandatory –will there be automatic enrolment, and will the system be funded or pay-as-you-go? Will it be defined benefit, defined contribution or hybrid? The country will have to consider best practices and then tailor these practices to suit its unique circumstances.
Editor’s thoughts: If South Africa fails to implement a Second Tier social security net the risk is its citizens will pressure government for more benefits in the First Tier. The country is already at risk of becoming a full-blown welfare state. Can South Africa successfully implement retirement reform and NHI simultaneously? Add your comment below, or send it to [email protected]
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